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Investing basics: what is robo advice?

Emma Rapaport  |  11 Jan 2019Text size  Decrease  Increase  |  
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Financial advice can be costly, and many Australians can't afford the fees. Advisers can also have minimum investment requirements, meaning that if you only have a small savings pot, they may not take you on as a client.

There are also concerns about trust; the Royal Commission shone a light on troubling examples of financial advisers and industry executives putting their interests ahead of others. 

These roadblocks leave many investors fending for themselves—without the time, knowledge and skills to invest. For many, this could be enough to put them off investing altogether.

But there may be another option.

What is robo advice?

Robo advisers offer a simplified version of services performed by traditional face-to-face financial advisers but for a fraction of the cost.

Robo advice—also referred to as digital advice or automated advice—is a new type of wealth management that uses technology to invest in a portfolio based on your risk preferences and goals.  

You won't sit down with an adviser. The entire process is done online without paperwork of office hours. Robo advice uses a series of questions and an algorithm to understand your financial situation, and then invests your savings in one of a series of diversified portfolios.

How does robo advice work?

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Robo advice will typically start with a series of questions to help get a sense of your risk appetite, investment horizon and why you are investing.

Then, based on your answers, they'll recommend one of their pre-set investment strategies. These portfolios typically include a range of asset classes such as Australian and international shares, emerging marker shares, listed property, fixed income, cash. They are risk rated, from very cautious, which will contain more low-risk assets such as cash and bonds, to adventurous which will contain more high-risk assets such as emerging market equities. Most robo advisers offer between five and 10 portfolio.  

Portfolios typically comprise a selection of exchange-traded-funds, which can be easily traded, and help keep costs low.

As the market fluctuates, the robo adviser will rebalance the portfolios to maintain the optimal mix of assets to match the risk tolerance. They should also send you regular performance reporting and reviews.

How robo advice differs from traditional financial advice 

How robo advice differs from traditional financial advice


A financial adviser will go beyond a simple assessment your financial situation and automatic investment into an investment portfolio. A good adviser will get to know you based on more than just 10 pre-set questions; they will understand your financial goals and appetite for risk, be a friendly face to turn to, build a bespoke financial plan to help you meet those goals, manage your investment portfolio, and coach you through the difficult markets.

A portfolio run by a human financial adviser is also bespoke. If you don’t want to be invested in China, or Telstra (ASX: TLS) because you already have exposure elsewhere, or have a particular affinity to smaller companies, they can adjust your portfolio accordingly.

Many advisers also offer additional services including estate planning, tax guidance, retirement, superannuation, and insurance planning.

But of course, these extra benefits quite rightly come with a higher price tag.

What else should I know about robo advice?

Cynthia Loh, VP of digital advice and innovation at American wealth management firm Charles Schwab says robo advice has been a great thing for consumers and the financial advice industry, but there are some things investors should watch out for.   

"Robo advice makes planning and advice more accessible to more people, one of the most critical issues facing the financial services industry today," she says.  

"Consumers want experiences that are both low cost and as easy as ordering an Uber, or one-click shopping on Amazon, and the way they invest should be no different.

"However, robo advisors are less suited for a consumer who prefers a traditional, in-person advice model or those clients who have highly complex financial situations."

There are also industry concerns regarding how simple the risk-tolerance assessment can be with robo advice. Some services allocate your cash based on as few as 10 questions—and answering them accurately requires a level of self-awareness that many beginner investors do not have.

Advantages and disadvantages

robo advice advantages and disadvanatges

Comparing Australian robo advisers

There are currently four main robo advisers operating in Australia

Compare robo advisers Australia

*We have not included micro investment app Raiz in our comparison as they don't provide personal advice. However, they offer similar access to automated investment portfolios

**ETF providers charges management fees which will be passed onto you as an investor. These costs are in addition to the fees charged by the robo adviser for advice and portfolio management

Is robo advice right for you?

Robo advice is a great option for first-time investors with long time horizons and simple investment goals. They're cheap, accessible, convenient; perfect if you are short on time and cash.

However, as your needs change and your financial situation becomes more complex, or want to have more control over your investment choices, you may outgrow robo advice. Do-it-yourself investing or seeking out a qualified and reputable financial adviser are both great secondary options.

is the editorial manager for Morningstar Australia. Connect with Emma on Twitter @rap_reports. You can email Morningstar's editorial team editorialAU[at]morningstar[dot]com

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